UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended December 31, 2005 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the transition period from __________ to ___________
Commission file number 0-10541
COMTEX NEWS NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3055012
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
625 N. WASHINGTON STREET
SUITE 301
ALEXANDRIA, VIRGINIA 22314
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(703) 820-2000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------------------------------------
Former address:
4900 Seminary Road, Suite 800
Alexandria, Virginia 22311
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
Accelerated Filer Yes No Accelerated Filer Yes No
--- --- --- ---
Non-Accelerated Filer Yes No X
--- ---
Indicate by check mark whether the registrant is a Shell Company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of February 12, 2006 13,700,247 shares of the Common Stock of the registrant,
par value $0.01 per share, were outstanding.
COMTEX NEWS NETWORK, INC.
TABLE OF CONTENTS
Part I Financial Information: PAGE NO.
--------
Item 1. Financial Statements
Balance Sheets 2
as of December 31, 2005 (unaudited)
and June 30, 2005
Statements of Operations 3
for the Three and Six Months Ended
December 31, 2005 and 2004 (unaudited)
Statements of Cash Flows 4
for the six Months Ended
December 31, 2005 and 2004 (unaudited)
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information:
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURES 18
Comtex News Network, Inc.
Balance Sheets
December 31, June 30,
2005 2005
---------------- ----------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 1,502,450 $ 1,225,323
Accounts Receivable, Net of Allowance of $180,758 1,001,595 751,433
Prepaid Expenses and Other Current Assets 40,981 223,789
---------------- ----------------
TOTAL CURRENT ASSETS 2,545,026 2,200,544
PROPERTY AND EQUIPMENT, NET 265,487 425,008
DEPOSITS AND OTHER ASSETS 49,657 54,657
---------------- ----------------
TOTAL ASSETS $ 2,860,170 $ 2,680,209
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Expenses $ 1,092,248 $ 1,072,780
Accrued Payroll Expense 131,460 131,605
Amount due under Bank Financing Agreement - 151,713
Deferred Revenue 15,758 15,829
Capital Lease Obligations, Current 15,553 16,722
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,255,019 1,388,649
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long Term 0 6,633
Long-Term Note Payable - Affiliate 856,954 856,954
Deferred Rent 15,529 21,785
---------------- ----------------
TOTAL LONG-TERM LIABILITIES 872,483 885,372
---------------- ----------------
TOTAL LIABILITIES 2,127,502 2,274,021
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 Par Value - 25,000,000 Shares Authorized;
13,700,247 and 13,600,247 Shares issued and outstanding, respectively 137,002 136,002
Additional Paid-In Capital 12,758,673 12,311,898
Accumulated Deficit (12,163,007) (12,041,712)
---------------- ----------------
Total Stockholders' Equity 732,668 406,188
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,860,170 $ 2,680,209
================ ================
The accompanying "Notes to Financial Statements" are an integral part of these financial statements
2
Comtex News Network, Inc
Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
----------------------------- ------------------------------
2005 2004 2005 2004
----------------------------- ------------------------------
Revenues $ 1,932,612 $ 2,085,578 $ 3,929,043 $ 4,072,927
Cost of Revenues
(including depreciation and amortization expense
of approximately $37,000, $99,000, $82,000 and
$199,000) 938,407 967,016 1,874,834 1,946,798
----------------------------- ------------------------------
Gross Profit 994,204 1,118,562 2,054,209 2,126,129
Operating Expenses:
Technical Operations & Support 314,404 337,935 634,519 669,675
Sales & Marketing 157,552 173,701 301,114 314,871
General & Administrative 324,801 369,454 639,802 691,830
Stock-based Compensation (a) 321,053 437,775
Depreciation & Amortization 38,112 78,291 98,951 158,840
----------------------------- ------------------------------
Total Operating Expenses 1,155,922 959,381 2,112,161 1,835,216
Operating Income (Loss)/ Income (161,717) 159,181 (57,952) 290,913
Other expense, net
Interest Expense (22,460) (41,219) (47,443) (76,458)
Interest Income - 1,485 - 1,270
----------------------------- ------------------------------
Other Expense, net (22,460) (39,734) (47,443) (75,188)
Income (Loss ) Before Income Taxes (184,177) 119,447 (105,395) 215,725
Income Taxes - - 15,900 -
----------------------------- ------------------------------
Net (Loss) / Income $ (184,177) $ 119,447 $ (121,295) $ 215,725
============================= ==============================
Basic Earnings (Loss) Per Common Share $ (0.01) $ 0.01 $ (0.01) $ 0.02
============================= ==============================
Weighted Average Number of Common Share 13,700,247 13,600,247 13,650,247 13,599,542
============================= ==============================
Diluted Earnings (Loss ) Per Common Share $ (0.01) $ 0.01 $ (0.01) $ 0.01
============================= ==============================
Weighted Average Number of Shares Assuming Dilution 13,700,247 14,645,388 13,650,247 14,644,683
============================= ==============================
(a) Stock-based compensation costs are allocated in operating expense categories as follows: For the three months
ended December 31, 2005- Technical Operations & Support - $22,223; Sales & Marketing - $16,756; General &
Administrative - $282,074. For the six months ended December 31, 2005 - Technical Operations & Support - $30,361;
Sales & Marketing - $22,419; General & Administrative - $384,995
The accompanying "Notes to Financial Statements" are an integral part of these financial statements
3
Comtex News Network, Inc.
Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31,
---------------------------
2005 2004
------------- -------------
Cash Flows from Operating Activities:
Net (Loss) Income $ (121,295) $ 215,725
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and Amortization 180,698 357,631
Bad Debt Expense - 15,000
Stock Based Compensation 437,775 -
Changes in Assets and Liabilities:
Accounts Receivable (250,162) 138,890
Prepaid Expenses and Other Current Assets 182,807 755
Deposits and Other Assets 5,000 -
Accounts Payable and Accrued Expenses 19,468 (158,713)
Accrued Payroll Expense (145) 43,244
Deferred Revenue (71) (71,223)
Deferred Rent (6,256) (1,105)
------------- -------------
Net Cash provided by Operating Activities 447,819 540,204
Cash Flows used in Investing Activity-
Purchases of Property and Equipment (21,177) (34,762)
------------- -------------
Cash Flows from Financing Activities:
Repayments - Capital Lease Obligations (7,802) (22,850)
Repayments on Bank Financing Agreement (151,713) (133,671)
Proceeds from Exercise of Stock Options 10,000 -
------------- -------------
Net Cash used in Financing Activities (149,515) (156,521)
Net Increase in Cash 277,127 348,921
Cash at Beginning of Period 1,225,323 461,419
------------- -------------
Cash at End of Period $ 1,502,450 $ 810,340
============= =============
------------- -------------
Supplemental Disclosure of Cash Flow Information: 2005 2004
------------- -------------
Cash paid for income taxes 15,900 -
Cash paid for interest expense 47,443 76,458
The accompanying "Notes to Financial Statements" are an integral part of these financial statements
4
COMTEX NEWS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2005
1. BASIS OF PRESENTATION
The accompanying interim financial statements of Comtex News Network, Inc. (the
"Company" or "Comtex") are unaudited, but in the opinion of management reflect
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of results for such periods. In November of 2004, the company
sold its inactive wholly owned subsidiary nFactory Comtex, S.L. for an
immaterial amount. The results of operations for any interim period are not
necessarily indicative of results for the full year. The balance sheet at June
30, 2005 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2005 ("2005 Form 10-K"), filed
with the Securities and Exchange Commission on September 28, 2005.
On December 16, 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT. SFAS
No. 123R which addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using Accounting Principles
Board Opinion No. 25 and generally requires that such transactions be accounted
for using a fair-value-based method. Comtex adopted this standard on its
effective date, July 1, 2005.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS 123, the Company's net income and
net income per share would have been adjusted to the pro forma amounts indicated
below:
Three months ended Six months ended
December 31, December 31,
--------------------- ---------------------
2004 2004
--------------------- ---------------------
Net Income, as reported $ 119,447 $ 215,725
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method for
all awards, net of related tax effects - 82,919
--------------------- ---------------------
Pro Forma Net Income 119,447 132,806
===================== =====================
Basic Income Per Share, as reported $ 0.01 $ 0.02
===================== =====================
Diluted Income Per Share, as reported $ 0.01 $ 0.01
===================== =====================
Basic Income Per Share, pro forma $ 0.01 $ 0.01
===================== =====================
Diluted Income Per Share, pro forma $ 0.01 $ 0.01
===================== =====================
The per share weighted-average fair value of stock options granted for the three
and six month periods ended December 31, 2004 was $0.23 and $0.17 respectively,
on the grant date with the following weighted average assumptions:
5
Three months ended Six months ended
December 31, December 31,
--------------------- ---------------------
2004 2004
--------------------- ---------------------
Expected dividend yield 0 0
Risk-free interest rate 4.12% - 4.48% 4.12% - 4.48%
Expected life (in years) 10 10
===================== =====================
Volatility 1.5 1.5
===================== =====================
The company has one stock-based employee compensation plan, which is described
more fully below. Prior to July 1, 2005, the company accounted for this plan
under the recognition and measurement provisions of APB Opinion 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations, as permitted by FASB
Statement No.123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Effective July 1,
2005, the company adopted the fair value recognition provisions of FASB
Statement No. 123(R), SHARE-BASED PAYMENT, using the modified-prospective
transition method. Under this method, compensation cost recognized for the six
months ended December 31, 2005 includes: (a) compensation costs for all share
based payments granted prior to, but not yet vested as of July 1, 2005, based on
grant-date fair value estimated in accordance with the original provisions of
statement 123, and (b) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant-date fair value estimated in
accordance with the provisions of 123(R). Results for prior periods have not
been restated. As a result of adopting Statement 123(R) on July 1, 2005, the
company's income before income taxes and net income for the three and six month
periods ended December 31, 2005 were approximately $321,000 and $438,000 lower
than if it had continued to account for share-based compensation under Opinion
25. Basic and diluted earnings per share would have been $0.01 had the company
not adopted SFAS 123R compared to $(0.01) for basic and diluted earning per
share with the adoption. There would have been no effect on cash flow from
operations and cash flow from financing activities for the three and six month
periods ended December 31, 2005, if the company had not adopted statement
123(R).
Stock Option Plan
Stock options are typically granted to employees with an exercise price equal to
the market price of the company's stock at the date of grant. Stock options are
issued in accordance with a vesting schedule and, generally vest over one to
three years, and have a term of 10 years. Compensation expense for stock options
is recognized over the requisite service period for each separately vesting
portion of the stock option award.
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic
Options Exercise Price Term Value
------------ -------------- ----------------- ------------------
Outstanding at June 30, 2005 1,332,929 $0.25
Granted 1,668,000 $0.34
Exercised (100,000) $0.10
Forfeited (10,330) $0.82
------------
Outstanding at December 31, 2005 2,890,599 $0.31 6.3 $ 385,690
============ ============== ================= ==================
Vested or Expected to Vest 2,807,199 $0.31 6.3 $ 379,852
============ ============== ================= ==================
Exercisable or Convertible at December 31, 2005 2,048,465 $0.31 6.3 $ 288,466
============ ============== ================= ==================
6
As of December 31, 2005, 2,048,465 stock option grants had vested. Of this
total, 964,765 were granted prior to July 1, 2005, and 1,083,700 were granted
subsequent to July 1, 2005. In the six months ended December 31, 2005, 100,000
options were exercised. The intrinsic value of these options was $3000, during
the six months ended December 31, 2005.
The fair value of stock options issued in the six-month period ending December
31, 2005 was estimated to be $0.47, using a Black-Scholes-option pricing model.
The model considers assumptions related to exercise price, expected volatility,
risk-free interest rate, and the weighted average expected term of the stock
option grants. Expected volatility assumptions utilized in the model were based
on historical volatility of the company's stock price over the expected term.
The risk-free rate is derived from the U.S. Treasury yield. The expected term of
options granted is derived from the output of the option valuation model and
represents the period of time that options granted are expected to be
outstanding. No options were granted in three-month period ended December 31,
2005. The fair values of options granted in the first quarter of fiscal 2006
were estimated at the date of grant with the following assumptions:
Risk-free interest rate 4.2%
Expected Volatility Factor 169%
Expected life (in years) 6.2
Exercise Price $ 0.34
Expected Dividend 0
-------------------
Fair Value of each option $ 0.47
===================
As of December 31, 2005, the company had one share-based plan, which is
described above. The plan expired as of October 12, 2005. The compensation cost
charged against income for this plan was approximately $438,000. This number
includes (a) approximately $28,000 of cost from compensation costs for all share
based payments granted prior to, but not yet vested as of July 1, 2005, based on
grant-date fair value estimated in accordance with the original provisions of
statement 123, and (b) $410,000 compensation cost for all share-based payments
granted subsequent to July 1, 2005, based on the grant-date fair value estimated
in accordance with the provisions of 123(R), net of 5% discount for post vesting
forfeitures based on an overall low turnover. No income tax benefits are
recognized in the income statement for share-based arrangements due to the
utilization of federal and state net operating loss carryforwards.
As of December 31, 2005, the total compensation cost related to non-vested
awards not yet recognized is approximately $484,000. The weighted-average period
over which this cost is expected to be recognized is 4 months.
Total compensation cost classified as marketing expense pertains to options
granted to employees in the marketing department. In contrast, no performance
was required and no consideration was received for the instrument.
Income (loss) per share is presented in accordance with the provisions of SFAS
No. 128, "Earnings Per Share" ("EPS"). Basic EPS excludes dilution for
potentially dilutive securities and is computed by dividing Income (losses)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or
7
converted into common stock and resulted in the issuance of common stock.
Diluted net income (loss) per common share for the three and six month periods
ended December 31, 2005 and 2004 do not include the effects of options to
purchase approximately .9 million and 1.2 million as the inclusion of these
options would have been anti-dilutive due to the options' exercise prices being
greater than the average market price of the Company's common shares during the
respective periods.
2. INCOME TAXES
There is no provision for income taxes for the six months ended December 31,
2004 due to the utilization of federal and state net operating loss
carryforwards. The provision for income tax for the six months ended December
31, 2005 is due to the alternative minimum tax.
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using the enacted tax rates in effect
for the year in which the differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance when the Company cannot make the
determination that it is more likely than not that some portion or all of the
related tax asset will be realized.
3. COMMITMENTS AND CONTINGENCIES
In July 2003, the Company commenced negotiations with its landlord regarding the
proposed termination of the lease obligation at 4900 Seminary Road. On December
9, 2003, the Company and Plaza I-A executed a settlement agreement terminating
the subject lease and the above lawsuit was dismissed on or about December 17,
2003. The total remaining liability on the lease was approximately $2.6 million
prior to the settlement agreement. Pursuant to the terms of the settlement
agreement, the Company paid rent and legal fees of approximately $147,000 and
entered into a four-year note payable to Plaza I-A for $360,000, which was
secured by a $360,000 certificate-of-deposit-backed standby letter of credit
(See Note 4). In January 2005, the note was repaid and the
certificate-of-deposit-backed standby letter of credit was released.
On April 15, 2004, the Company's former Chairman/CEO and President, who both
resigned on February 5, 2004, filed a demand for arbitration against the Company
related to the terms of their employment agreements. The demand alleged a breach
of the employment agreements and requested payment of approximately $129,000 to
the former employees. The company denies the allegations and intends to
vigorously defend this action. Based upon events to date in the arbitration, the
company has accrued approximately $80,000 in expenses as of December 31, 2005.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by management
to be immaterial to our financial condition.
8
4. NOTES PAYABLE
In December 2003, in connection with the lease termination discussed above (see
"Commitments and Contingencies"), the Company executed a four-year note payable
in the amount of $360,000 to Plaza I-A, effective November 1, 2003, with
interest payable monthly at 4% per annum and principal payments of $10,000 per
month, beginning January 1, 2004. The note was secured by a letter of credit
provided by Silicon Valley Bank (the "Bank"). The letter of credit was secured
by the Company's $360,000 certificate of deposit held by the Bank. In January
2005, the note was repaid and the certificate-of-deposit-backed standby letter
of credit was released.
Also in December 2003, the Company entered into an Accounts Receivable Purchase
Agreement with the Bank (the "Financing Agreement"), which provides for a
revolving line of credit of up to $1 million collateralized by the Company's
accounts receivable. As of December 27, 2004, the Company entered into the
Second Amendment to the Accounts Receivable Purchase Agreement, dated as of
December 18, 2003, by and between the Bank and the Company. Under this Amended
Agreement, the applicable rates were lowered, certain covenants were amended and
the term was extended through the end of calendar year 2005. As of December 31,
2005, the company entered into the Third Amendment to the Accounts Receivable
Purchase Agreement, dated December 15, 2005. Under this amended agreement, the
applicable rates were lowered, the financial covenants amended to include no
restriction on cash and the term was extended through the end of calendar year
2006. As of December 31, 2005, the balance due to the Bank related to advances
under the Financing Agreement was fully repaid.
On December 9, 2003, the Company executed an amendment to the Amended,
Consolidated and Restated 10% Senior Subordinated Secured Note (the "Amended
Note"), payable to Amasys Corporation ("Amasys"), an affiliated company, (said
amendment the "Third Amendment") for the purpose of reducing the price at which
the Amended Note may be converted into common stock of the Company. Pursuant to
the Third Amendment, Amasys agreed to subordinate the Amended Note to both the
Company's note payable to its former landlord and to the Financing Agreement. In
consideration for these subordination agreements, the Company agreed to reduce
the conversion price stipulated in the Amended Note from the previously-stated
conversion price of $1.20 per share to $0.75 per share, and to increase this
conversion price by $0.05 every one hundred and eighty (180) days thereafter. At
the date of the transaction the conversion price of the Amended Note was in
excess of the stock price. As of December 31, 2005, the Amended Note had a
principal balance of $856,954 and the conversion rate was $0.95. The outstanding
principal balance of the Amended Note is due in July 2008.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with financial statements and the related notes
included elsewhere in this Form 10-Q and the consolidated financial statements
and related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our annual report on Form 10-K
for the year ended June 30, 2005 filed with the Securities and Exchange
Commission on September 28, 2005. Historical results and percentage
relationships among any amounts in the Consolidated Financial Statements are not
expected to be indicative of trends in operating results for any future period.
9
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements are subject to a variety of
risks and uncertainties, many of which are beyond our control, which could cause
actual results to differ materially from those contemplated in these
forward-looking statements. In particular, the risks and uncertainties include
those described in our annual report on Form 10-K, for the year ended June 30,
2005 and in other periodic Securities and Exchange Commission filings. These
risks and uncertainties include, among other things, the consolidation of the
Internet news market; competition within our markets; the financial stability of
our customers; maintaining a secure and reliable news-delivery network;
maintaining relationships with key content providers; attracting and retaining
key personnel; the volatility of our Common Stock price; successful marketing of
our services to current and new customers; and operating expense control.
Existing and prospective investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to update or revise the information contained in this
Form 10-Q, whether as a result of new information, future events or
circumstances or otherwise.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2005, TO THE THREE MONTHS
ENDED DECEMBER 31, 2004
During the three months ended December 31, 2005, we reported an operating loss
of approximately $162,000, compared to net income of approximately $159,000
during the three months ended December 31, 2004. We reported net loss of
approximately $184,000 during the three months ended December 31, 2005, compared
to a net income of approximately $119,000 for the three months ended December
31, 2004. As discussed below, the decline in operating and net income is due
primarily to decreased gross profit margins and increased operating expenses,
primarily stock based compensation due to the adoption of SFAS 123 (R).
Revenues consist primarily of royalty revenues and fees from the licensing of
content products to information distributors. During the three months ended
December 31, 2005, total revenues were approximately $1,933,000 or approximately
$153,000 (7%) less than the total revenues for the three months ended December
31, 2004. The decrease is due to a loss of clients as a result of business
consolidations, primarily in the Internet and personal investor markets
partially offset by growth in database customer revenue.
Our cost of revenues consists primarily of content license fees and royalties to
information providers, depreciation and amortization expense on our production
software, and data communication costs for the delivery of our products to
customers. The cost of revenues for the three months ended December 31, 2005 was
approximately $938,000 or approximately $29,000 (3%) less than the cost of
revenues for the three months ended December 31, 2004. The decrease in cost is
due to a reduction in content fixed fees of approximately $34,000, a decrease of
approximately $62,000 in depreciation and amortization expense, and a decrease
10
of approximately $1,000 in data transmission costs which was offset by an
increase in content royalties of approximately $68,000.
Gross profit for the three months ended December 31, 2005 was approximately
$994,000 or approximately $124,000 (11%) less than the gross profit for the same
period in the prior year. The gross profit as a percentage of revenue declined
for the three months ended December 31, 2005 to approximately 51% from
approximately 54% for the three months ended December 31, 2004. The decline is
due to a decrease in revenues and a net increase in content royalty costs, which
was offset by a decrease in data transmission costs as discussed above.
Total operating expenses for the three months ended December 31, 2005 were
approximately $1,156,000 representing an approximate $197,000 (20%) increase in
operating expenses from the three months ended December 31, 2004. The increase
in expenses resulted from an increase in stock-based compensation due to the
adoption of SFAS 123 (R) as discussed above partially offset by a decrease in
technical operations support expenses, sales and marketing expenses, general and
administrative expenses, and depreciation and amortization expenses.
Technical operations and support expenses during the three months ended December
31, 2005 decreased approximately $24,000 (7%) from the three months ended
December 31, 2004. The decrease is primarily due to expenses incurred for
outsourced technology services for technical consultants (to provide management,
systems administration, and programming services and to move the production data
center to an offsite, hosted facility), and was partially offset by increases in
collocation and personnel expenses in the current period.
Sales and marketing expenses decreased by approximately $16,000 (9%) for the
three months ended December 31, 2005 compared to the three months ended December
31, 2004. The decrease is the result of decreases in personnel and related
commission expenses over the same period in the prior year.
General and administrative expenses for the three months ended December 31, 2005
were approximately $45,000 (12%) less than these expenses during the three
months ended December 31, 2004. The decrease resulted primarily from a decrease
in general and administrative and related expenses, partially offset by an
increase in rent expense as a result of an increase in leased office space, and
an increase in public accounting fees of approximately $8,000. Additional
decreases resulted primarily from a decrease in professional and consulting fees
of approximately $22,000 and a decrease in business license fees of
approximately $10,000 as result of the tax exempt categorization by the City of
Alexandria.
Stock-based compensation was approximately $321,000 during the three months
ended December 31, 2005 and was related to the adoption of the SFAS 123 (R), as
discussed above.
Depreciation and amortization expense for the three months ended December 31,
2005 was approximately $40,000 (51%) lower than the expense during the same
period in the prior year. The decrease was due primarily to the disposal of
assets related to the office move and the expenses associated with the move of
our data center to an offsite, hosted facility in the prior year.
Other expense, net of other income, for the three months ended December 31, 2005
decreased approximately $17,000, or 43%, compared to the three months ended
December 31, 2004. This
11
decrease was mainly due to a decrease in interest expenses related to the bank
financing agreement, settlement of the note payable to our former landlord, and
reduction in interest on capital leases.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2005, TO THE SIX MONTHS ENDED
DECEMBER 31, 2004
During the six months ended December 31, 2005, we reported an operating loss of
approximately $58,000, compared to operating income of approximately $291,000
during the six months ended December 31, 2004. We reported a net loss of
approximately $121,000 during the six months ended December 31, 2005, compared
to net income of approximately $216,000 for the six months ended December 31,
2004. As discussed below, the decline in operating and net income is due
primarily to decreased gross profit margins and increased operating expenses,
primarily stock based compensation due to the adoption of SFAS 123 (R).
Revenues consist primarily of royalty revenues and fees from the licensing of
content products to information distributors. During the six months ended
December 31, 2005, total revenues were approximately $3,929,000 or approximately
$144,000 (4%) less than the total revenues for the six months ended December 31,
2004. The decrease in revenues is primarily due to a loss of clients as a result
of business consolidations, primarily in the Internet and personal investor
markets, as well as reductions in our distributor clients' royalty costs due to
a decline in their revenues.
Our cost of revenues consists primarily of content license fees and royalties to
information providers, depreciation and amortization expense on our production
software, and data communication costs for the delivery of our products to
customers. The cost of revenues for the six months ended December 31, 2005 was
approximately $1,875,000 or approximately $72,000 (3%) less than the cost of
revenues for the six months ended December 31, 2004. The decrease in cost is due
to a reduction in content fixed fees of approximately $57,000, a decrease of
approximately $117,000 in depreciation and amortization expense, and a decrease
of approximately $5,000 in data transmission costs which was offset by an
increase in content royalties of approximately $107,000.
Gross profit for the six months ended December 31, 2005 was approximately
$2,054,000 or approximately $72,000 (3%) less than the gross profit for the same
period in the prior year. The gross profit as a percentage of revenue for the
six months ended December 31, 2005 was unchanged at approximately 52% as was for
the six months ended December 31, 2004.
Total operating expenses for the six months ended December 31, 2005 were
approximately $2,112,000 representing an approximate $277,000 (15%) increase in
operating expenses from the six months ended December 31, 2004. The increase in
expenses resulted from an increase in stock-based compensation due to the
adoption of SFAS 123 (R) as discussed above partially offset by a decrease in
technical operations support expenses, sales and marketing expenses, general and
administrative expenses, and depreciation and amortization expenses.
Technical operations and support expenses during the six months ended December
31, 2005 decreased approximately $35,000 (5%) from the six months ended December
31, 2004. The decrease is primarily due to expenses incurred for outsourced
technology services for technical consultants (to provide management, systems
administration, and programming services and to
12
move the production data center to an offsite, hosted facility), and was
partially offset by increases in collocation and personnel expenses in the
current period.
Sales and marketing expenses decreased by approximately $14,000 (4%) for the six
months ended December 31, 2005 compared to the six months ended December 31,
2004. The decrease is the result of decreases in personnel and related
commission expenses over the same period in the prior year.
General and administrative expenses for the six months ended December 31, 2005
were approximately $52,000 (8%) less than these expenses during the six months
ended December 31, 2004. The decrease resulted primarily from a decrease in
general and administrative and related expenses, partially offset by an increase
in rent expense as a result of an increase in leased office space, an increase
in personnel and recruiting expenses due to the appointment of the President and
Chief Operation Officer, and an increase in public accounting fees of
approximately $12,000. Additional decreases resulted primarily from a decrease
in consulting fees of approximately $8,000; a decrease in professional and
consulting fees of approximately $30,000; a decrease in board of director fees
of approximately $7,000 due to a decrease in the number of meetings in the
current period and business license fees as result of the tax exempt
categorization by the City of Alexandria.
Stock-based compensation was approximately $437,000 during the six months ended
December 31, 2005 and was related to the adoption of the SFAS 123 (R), as
discussed above.
Depreciation and amortization expense for the six months ended December 31, 2005
was approximately $60,000 (38%) lower than the expense during the same period in
the prior year. The decrease was due primarily to the disposal of assets related
to the office move and the expenses associated with the move of our data center
to an offsite, hosted facility in the prior year.
Other expense, net of other income, for the six months ended December 31, 2005
decreased approximately $27,000, or 38%, compared to the six months ended
December 31, 2004. This decrease was mainly due to a decrease in interest
expenses related to the bank financing agreement, settlement of the note payable
to our former landlord, and reduction in interest on capital leases.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 2005, we had an operating loss of
approximately $58,000 and a net loss of approximately $121,000. At December 31,
2005, we had working capital of approximately $1,290,000, compared to a working
capital of approximately $812,000 at June 30, 2005. We had net stockholders'
equity of approximately $733,000 and $406,000 at December 31, 2005 and June 30,
2005 respectively. The increase in stockholders' equity is primarily due the
recording of stock-based compensation for the six months ended December 31,
2005.
We had cash of approximately $1,502,000 at December 31, 2005, compared to
$1,225,000 at June 30, 2005. For the six months ended December 31, 2005,
operating activities generated approximately $448,000 in cash.
13
We made capital expenditures of approximately $21,000 during the six months
ended December 31, 2005, primarily for computer and communications equipment for
new staff and product development. Financing activities resulted in payments of
approximately $150,000 made on capital leases and repayment of the Line of
Credit for Accounts Receivable Purchase Agreement with Silicon Valley Bank (the
"Financing Agreement"), and $10,000 in proceeds from exercise of stock options.
The Company's future contractual obligations and commitments as of December 31,
2005 are as follows:
AMOUNTS DUE BY PERIOD
--------------------------------------------------------
2006 2007 2008
--------------------------------------------------------
Operating Leases $ 101,453 $ 97,872 $ -
Capital Leases 10,109 6,834 -
Note Payable, Affiliate - - 856,954
--------------------------------------------------------
Total $ 111,562 $ 104,706 $ 856,954
========================================================
Currently we are dependent on our cash reserves to fund operations and the
accounts receivable financing through the bank available. We recorded a net loss
for the quarter ended December 31, 2005 and our revenue base has been declining.
Assuming no immediate increase in revenue or an infusion of capital, the Company
is at risk of being unable to generate sufficient liquidity to meet its
obligations. The Company utilized and will utilize its Financing Agreement,
should the need arise, to meet its liquidity needs. Further corporate
consolidation or market deterioration affecting our customers could impair our
ability to generate such revenues. No assurance may be given that we will be
able to maintain the revenue base or the profitable operations that may be
necessary to achieve our liquidity needs.
EBITDA, as defined below, was approximately $561,000 for the six months ended
December 31, 2005 compared to EBITDA of approximately $648,000 for the six
months ended December 31, 2004. The decrease in EBITDA during the six months
ended December 31, 2005 compared to the six-month period in the prior year is
the net result of decreased revenues and reduced cost of revenues, partially
offset by an increase in stock based compensation due to the adoption of SFAS
123 (R). The table below shows the reconciliation from net (loss) income to
EBITDA;
14
Three Months
Ended December 31,
2005 2004
--------------------------------
Reconciliation to EBITDA:
Net (loss) Income $ (121) $ 216
Stock Based Compensation 438 -
Depreciation and Amortization 181 357
Interest/Other Expenses 47 75
Income Taxes 16 -
-----------------------------------
EBITDA $ 561 $ 648
EBITDA consists of earnings before interest expense, interest and other income,
income taxes, depreciation and amortization. EBITDA does not represent funds
available for management's discretionary use and is not intended to represent
cash flow from operations. EBITDA should also not be construed as a substitute
for operating income or a better measure of liquidity than cash flow from
operating activities, which are determined in accordance with generally accepted
accounting principles. EBITDA excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA is not a term defined by U.S. generally accepted accounting
principles, and as a result, our measure of EBITDA might not be comparable to
similarly titled measures used by other companies.
However, we believe that EBITDA is relevant and useful information, which is
often reported and widely used by analysts, investors and other interested
parties in our industry. Accordingly, we are disclosing this information to
permit a more comprehensive analysis of our operating performance, as an
additional meaningful measure of performance and liquidity, and to provide
additional information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. See the financial
statements and notes thereto contained elsewhere in this report for more
detailed information.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates. However, our exposure to currency exchange rate fluctuations
ceased with the shutdown of our foreign subsidiary. We do not engage in hedging
activities.
Item 4.
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Controller have concluded, based on
their evaluation within 90 days prior to the filing date of this report, that
the Company's disclosure controls and procedures (as defined in Securities
Exchange Act Rules 13a-15(e) or 15d-15(e))
15
are effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes that have materially affected, or are reasonably likely to
materially affect the Company's internal controls over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the foregoing evaluation.
Part II. Other Information
Item 1. Legal Proceedings
On April 15, 2004, the Company's former Chairman/CEO and President, who both
resigned on February 5, 2004, filed a demand for arbitration against the Company
related to the terms of their employment agreements. The demand alleged a breach
of the employment agreements and requested payment of approximately $129,000 to
the former employees. The Company denies the allegations and intends to
vigorously defend this action. Based upon events to date in the arbitration, the
Company has accrued $80,000 in expenses.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by management
to be immaterial to our financial condition.
Item 1A. Risk Factors
There have been no material changes from the "Risk Factors" in our form 10-K for
the fiscal year ended June 30, 2005, filed with the SEC, on September 28, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
16
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMTEX NEWS NETWORK, INC.
(Registrant)
February 14, 2006 By: /S/ C.W. GILLULY
----------------------------
C.W. Gilluly, Ed.D.
Chairman and Interim
Chief Executive Officer
(Principal Executive Officer)
By: /S/ HILDA KWENA
----------------------------
Hilda Kwena
Treasurer & Controller
(Principal Financial and
Accounting Officer)
18